Federal budget deficit aided by improved revenues

A pick-up in revenue in the last months of the financial year could help pull the budget deficit back from a predicted $20 billion but a surplus is well beyond reach, economists say.

ANZ’s head of Australian economics and property research, Ivan Colhoun, said an annual rush of payments to the government in the lead-up to June could mean a less bruising deficit than the $20 billion forecast by some.

But the deficit would still be between $10 billion and $20 billion, he said.

“Towards the back end of the year there always tends to be a little bit more revenue around so we’d expect it to improve slightly," he said.

Mr Colhoun said a deficit of $20 billion was only 1.5 per cent of gross domestic product, which by global standards was a “fantastic" result.

“I don’t think it’s a big deal," he said. “It’s not saying fiscal policy is horrendously loose, it’s not saying the government has been bad at fiscal policy.

“What they really did was create a rod for their own back by saying they would get back into surplus . . . but they haven’t been able to do that because the nominal economy hasn’t been growing as quickly as expected. “

Much of the weakness in nominal growth has been caused by falling commodity prices since their peak in the September quarter of 2011 and compounded by a dollar above $US1.

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Mr Colhoun said if there was one criticism to be made about the government it was that it had underestimated the eventual drop in the terms of trade.

His is a more optimistic view than that of a team of analysts from Bank of America Merill Lynch led by Saul Eslake and Alex Joiner. On Friday, they predicted the deficit would hit $20 billion in 2012-13.

And that was only if Labor did not make any new spending commitments.

Mr Eslake told WeekendAFR he was concerned the government, having already suffered the political backlash of walking away from a commitment to deliver a surplus, would be tempted to “buy votes", pushing the deficit out even further.

Treasurer Wayne Swan in December scrapped his plan to deliver a $1.1 billion surplus in 2013-14.

Business groups have eased pressure on Treasurer
Wayne Swan
to return a surplus but a deficit of any amount gives the Coalition the opportunity to call Labor’s economic management skills into question.

Prime Minister
Julia Gillard
has promised to make room in the budget for more spending on schools and the National Disability Insurance Scheme. She has said she will find savings to do this rather than raise taxes. Treasury is believed to have warned that a surplus is unlikely before 2017.

Mr Swan was talking up spending rather than saving on Sunday. In his weekly economic note, he emphasised pension increases, which he said had been delivered despite difficult budget conditions.

“In dollar terms, since our historic 2009 reforms, the pension is now over $200 a fortnight more for both singles and couples," Mr Swan wrote.

“To put that in perspective, it took well over twice that long for the last $200 rise in the single aged pension to be realised."